National Treasury First Quarter Expenditure Report for 2014/15

Standing Committee on Appropriations

26 August 2014
Chairperson: Mr S Mashatile (ANC)
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Meeting Summary

The National Treasury briefed the Standing Committee on first quarter expenditure in the 2014/15 financial year. The highest level of underspending was in the Department of Cooperative Governance and Traditional Affairs. Underspending of R6.4 billion was due to underspending on the capital programme, on local government grants and the cleanup of the social security database. First quarter spending was mostly in line with projections. There was a decrease of 1.1 percent in spending on goods and services, as a result of cost containment measures.

During the discussion that followed the presentation, there was concern amongst Members about whether the 40 percent contribution to university funds from government resulted in skills development. Underspending and capacity to spend especially at local government level caused interest and concern amongst the Members. There was special concern about the fact that money witheld because of underspending had an impact on service delivery. It was felt that departments had to appoint people who had capacity to spend. The Committee interrogated the issue of debt, and the statement by the Treasury that debt was sustainable was challenged. There were remarks and questions about the high intake at higher education institutions, with a small amount graduating. High percentages voted to compensation of employees, caused concern, as money was being taken from other programmes. There was a call for business plans to be presented before money was given, to prevent lack of implementation and expenditure delay. It was asked if the economy was in recession. There was consensus that witholding funds had implications for service delivery.

Meeting report

Briefing by the National Treasury on first quarter expenditure for the financial year 2014/15
Mr Mathew Simmonds, Deputy Director General: Public Finance, briefed the Standing Committee on first quarter expenditure in the 2014/15 financial year. Overspending occurred in the Department of International Relations and Cooperation, and the Department of Transport. The highest levels of underspending were in the Departments of Cooperative Governance and Traditional affairs; Social Development; Health; Basic Education, and Human Settlements.

The briefing covered the following areas: cumulative revenue and expenditure; direct charges against the National Revenue Fund; state debt costs, and voted expenditure for operations, transfers and administration. Concluding remarks stated that underspending of R6.4 billion compared to the adjusted budgdet was due to underspending on the capital programme, on local government grants and the cleanup of the social security database. First quarter spending on most items was mostly in line with projections. There was a decrease of 1.1 percent in spending on goods and services, as a result of cost containment measures.

Ms S Shope-Sithole (ANC) noted that 40 % of university funding was from the State. The Treasury had to check if university plans mirrored the National Development Plan (NDP). There was a skills shortage. Universities saw themselves as part of the country. Their courses had to be aligned to the market demands rquired by the State. 40 percent was a large portion. Treasury had to demand accountability for that.

Mr Simmonds replied that it was an important issue. The challenge was to prepare young people for formal employment opportunities. The National Treasury gave an allocation to the Department of Higher Education (DHE) to use in accordance with its mandate. There was engagement with the DHE on the process. It was a bloc grant not based on financial need. Only the size of the university was taken into account. A more equitable formula was needed. The DHE was responsible for transformation of training. There had been engagement about that, in fact on the day before. Engagement included talking to civil society. Not only access to training was discussed, but also successful completion of courses. Many learners entered tertiary education, but few exited. There had to be more graduates. Modalities of delivery and relevance of service had to be discussed. The DHE could be asked to provide more detail about its contribution.

The Chairperson referred to the six billion underspending in the previous year. Funds had to be transferred to local government for infrastructure programme. Yet the Treasury was saying that all was well.

Mr Simmonds replied that things were not well on the overall macro level. But there was not much concern about over- or underspending on the vote level. The Departments of Health and of Education had disappointed in 2013/14. There had to be cuts from the school infrastructure grant and the national health insurance pilot project. There were challenges with implementation of the basic education school infrastructure backlog grant. The budget gave a chance to engage, but departments had to deliver. The Treasury could only give or take away money. There was inadequate capacity to spend on the health facility programme. Funded vacancies contributed to underspending. Some departments were at only 65 percent of their funded establishment.

The Chairperson asked about the situation at local government level.

Mr Simmonds replied that money had been witheld because of underspending of local grants. Money was not returned to the fiscus.

Mr M Figg (DA) remarked that when underspending led to money being witheld, programmes suffered. It was not a quick solution to withold money. If spending capacity was a challenge, people had to be found who could spend money.

Mr Simmonds replied that the capacity of municipalities could be absurd. The Treasury gave R4.5 billion per year for capacity support initiatives. There was support for service delivery but things were not getting better. The problem was that one could not assume that spending capacity at the national level was better. Funds had been taken from provincial basic education funds and changed to an indirect grant, but national also could not spend.

The Chairperson said that the issue had to be flagged out and returned to. As the Treasury had indicated, they could do but little. R2.1 billion had been witheld the previous year. He asked for an indication of what the figure would be in the current year. If the trend continued there would be real cause for concern. He granted that the first quarter was difficult. Treasury projected in terms of the lowest expenditure. Still the first quarter had a story to tell.

Dr C Madlopha (ANC) referred to lack of spending on infrastructure. She agreed that it would be better to get people who could implement, than to withold funds. She asked about the rule for indirect grants. Such grants could fast track expenditure.

Mr Simmonds replied that a deeper discussion of local government grants was needed. Stakeholders had to be held accountable. The intergovernmental financial relations unit in the Treasury was passionate. There had to be discussions with the Department of Cooperative Government and Traditional Affairs (CoGTA) and the Treasury about local government conditional grants.

Mr A McLaughlin (DA) referred to underspending by CoGTA. He asked if reasons were looked for. The problem was that the budget cycle did not correspond with the procurement cycle. The gap had to be bridged. It so happened that funds were taken away when it was time to pay. When money was witheld from the Department of Human Settlements for fraud, people who needed services were punished.

Mr Simmonds replied that Human Settlements had to put instruments to procure into place. Unless that was done, the Treasury could only withold money. The question with regard to fraudulent transactions was what the Human Settlements Portfolio Committee was doing about it.

Mr A Shaik Emam (DA) remarked that R6 billion had been spent to capacitate people on the ground, without result. It was an inditement against CoGTA, and would continue unless regulated.

Mr Simmonds responded that local government capacity was weak in CoGTA. There was lack of implementation due to systemic weakness. It would not do to simply replace people. Chili provided a good example of capital planning. There were carefully regulated and planned cycles for capital.

Mr McLaughlin referred to slide 7. He asked if the blue block indicated increasing State debt.

Mr Simmonds replied that interest costs added to the debt stock.

Mr McLaughlin referred to slide 8. He noted that the 45 percent mentioned there was not in the pi graph.

Mr Simmonds replied that the 45 percent direct charges against the revenue fund was for the salaries of Ministers, judges and the President. The Treasury had limited discretion. The Constitution entitled it, and not Parliament. Members of Parliament could not vote on their own salaries, and hence there was a direct charge against the revenue fund.

Mr McLaughlin referred to slide 9. He asked if interest was merely being paid, or whether debt was being reduced.

Mr Simmonds replied that there was no reduction in debt. Given the size of the debts, it was likely to increase as a percentage.

Mr McLaughlin referred to slide 13. he asked what portion was allocated to capital equipment and maintenance of assets.

Mr N Gcwabaza (ANC) asked about the R1.4 billion underspending by Social Development. He asked if the process was incomplete, or whether savings had been made by weeding out corrupt elements.

Mr Gcwabaza noted that there were many entrants into higher education, but few exited. The skills output was small. The DHE had to answer, possibly together with the Standing Committee and the Treasury. The situation had to be understood. Staistics South Africa were saying that there had in fact been deskilling in South Africa over the foregoing 20 years. Even graduates were not suitably qualified for employement. Huge grants could not be given if it could not be accounted for. The economy was not being assisted with skills development.

Mr Simmonds replied that a study by Servaas Van der Bergh had shown that unemployment for graduates was a mere six percent. Graduate chances to obtain work were good. There had been some success in the system. But government focus on access was exaggerated and cause for concern. There had to be a stronger focus on the success rate. Larger numbers had to graduate. The Medium Term Strategic Framework ( MTSF) higher education training indicators only focused on access. Success also had to be stressed.

Mr Figg referred to slide 4. There was no forward cover for depreciation in currency. He asked if the payment to Transport was a one-off.

Mr Simmonds replied that forward cover was expensive. Revenue from the Road Transport Management Company (RTMC) had been transferred to debt to pay. The RTMC had stated that money did not have to be transferred to it. It could be paid directly to the National Department of Transport.

Mr Figg asked if the 45 percent was before the budget was approved.

Mr Figg asked if payments to the DHE were in equal amounts, or whether it was upfront.

Mr Simmonds replied that it was not a bloc grant. It was paid through monthly transfers.

Mr Figg referred to slide 16. He asked if the 1.1 percent would continue.

Mr Simmonds replied that savings on goods and services would persist. Demands of SNT, accommodation and others were too strong. The Departments of Transport and of Energy had strong budgets for those. Goods and services budgets were under pressure. There were factors like petrol for the police and the opulence of the civil service.

Dr Madlopha referred to the seven departments where the largest proportion of the budget was spent on administration. She asked if there was something wrong.

Mr Simmonds replied that there had to be a more cost effective modality for administrative burdens. The Treasury had a small administrative unit. The size of a unit could not be halved.

The Chairperson asked if the elections had had an impact on expenditure in the first quarter, although it was likely that administrative work continued while politicians were campaigning.

Mr Simmonds replied that there was no evidence that there was impact on expenditure. Some departments had spent money before the Appropriation Bill. There were new departments created, and such took a while to develop. The former Department of Women, Children and People with Disabilities had spent nothing in the first year, but attained capacity after two or three years. Portfolio Committees had to be talked to whilst settling into service delivery.

Mr Shaik Emam asked if a breakdown of maintenance costs in all departments was possible.

Mr Simmonds replied that it could be obtained from the spending database.

Dr Madlopha noted that the Medium Term Economic Framework (MTEF) stretched over a three year period and made it possible for government to plan. The National Treasury had to ask a business plan from a department before money was given. There was lack of implementation and expenditure delays. Failure to spend impacted negatively on service delivery.

Mr Simmonds replied that Chili provided a good example of capital planning. There were carefully regulated and planned cycles for capital. Similar principles were being incorporated locally. Business plans of departments were evaluated. There were capital budgeting guidelines.

Ms M Manana (ANC) referred to the health revitilisation project. There had been problems since 2002. Every year budgeted money was not spent. Hospitals were falling apart.

Mr Simmonds replied that disappointing health performance came at a human cost. Portfolio Committees had to be spoken to about cooperation with other departments.

Ms Manana referred to money taken back at the end of the year from basic education.

Ms S Shope-Sithole (ANC) asked if public entities had to account. She asked if rents were free.

Mr Simmonds replied that public entities first accounted to departments and then to Parliament. Parliament could request direct reporting. Rents were never free. Government created rents formally.

Ms Shope-Sithole asked if there could be a breakdown of monies charged for renumeration of judges and MPs.

Mr Simmonds replied that the Auditor-General and the Chief procurement Officer could give a breakdown of direct charges.

Mr McLaughlin remarked that the overall picture for compensation of employees caused concern. There was increased spending, while spending in other areas dropped. It contributed to crippling debt. It was a scary trend. He was also concerned that the Financial and Fiscal Commission (FFC) had stated that debt was not much of a problem. It was in fact a huge problem.

Mr Simmonds replied that it was due to increased inflation. It was not due to an increase in the number of people employed. The only way to keep the compensation budget flat was to decrease the number of employees. But the Treasury had been advised against retrenchment. In other countries the fiscus had to collapse before people were retrenched. The compensation budget of large departments was tight, as they could not absorb inflation increases.

Mr Simmonds added that the level of debt had risen in the previous five years. There was concern, and the attempt to come up with a countercyclical response.
But debts had to be payed up sometime. Debt was still sustainable but there was a trend to higher debt. A comparison to peer economies showed that the country had been below them five to six years ago, but had then overtaken them. However, debts had levelled out in the peer countries but had continued to grow locally. The economy was not responding.

Mr Figg asked why it was said that debt was sustainable.

Mr Shaik Emam asked if it was wise to increase the debt level. Expectations were too high and above capacity. Things had to be slowed down. R142 billion had gone towards servicing debt, while entities were underspending. Expectations were being created. It was advisable to restrict debt and address challenges.

Mr Simmonds replied that revenue for faster economic growth was obtained from taxes. There was good government savings and four and a half to five and a half percent growth in the economy until 2008/9. Then came the crisis. It was sound economic practice to borrow to get through a trough. But the economy did not recover, and borrowing continued. There was a slowing down of the economy. Debt was considered sustainable because the growth rate was still higher than the growth of expenditure. But keeping expenditure down was difficult. Even when times of recovery were hard, debts had to be paid first.

Mr Shaik Emam asked if the country was in a recession.

Mr Simmonds replied that recession was a technical term, applied when there were two quarters of negative growth. The country was technically not in recession. But there was a low level of equilibrium. Not being in recession did not suggest that there was no problem.

Mr Owen Wilcox, Acting Chief Director: Economic Services (National Treasury) added that the reserve bank decided about official recession, but only after six months. Two negative quarters in succession had been avoided, but the levels of GDP growth were low.

Mr McLaughlin referred to slide 7. He remarked that spending money one did not yet have, was a tricky business.

Ms Shope-Sithole asked what was being done to assist the DTI to industrialise for growth.

Mr Wilcox replied that the DTI helped with R10 billion per year with industrial incentives. More industrialisation was needed. Manufacturing had to increase. The impact of government spending was not known. Monitoring and evaluation of manufacturing had to be competitive. There had to be a strong evaluation framework. The DTI had to roll out new incentive schemes. The MTSF industrial policy was more flexible and responsive. Winners were invested in, whilst cutting back on losers. Support was cut off for whatever did not work. There had to be more support for winners.

The Chairperson asked which the “red flag” delivery departments were. The Treasury had to be careful not to give money to those who could not spend.

Mr Simmonds replied that there were challenges around iindirect grants in basic education and health. Police and justice infrastructure spending went through good years and bad years. There was a problem with the Department of Public Works (DPW) for maintenance. There were concerns over capital spending for justice and police in the first quarter. Vacancy levels in national departments caused concern, with the staff establishment higher than the staff. Sometimes suitable people could not be found.

The Chairperson remarked that the Departments of Human Settlements and of Water Affairs were red flag departments.

Mr Tshepo Masoeu, Committee Content Adviser, noted that the areas where infrastructure investments were needed were health, education, human settlements, transport, police, and justice. Cooperative governance was important. The question was how much of the conditional grant transfer went to infrastructure. The findings of the Committee could be corroborated with those of other portfolio committees. Transfers towards infrastructure had to stipulate conditions for capacity support. It had to be made sure that plans were achieved. There had to be accessibility and reliability of information. The Treasury database could point out risk areas. The Committee could see that at the national Treasury.

Ms Shope-Sithole remarked that the Committee was responsible for allocation of funds. There had to be follow up on the DTI. The Department of Economic Development and Small Business could look at the other side of the coin.

Mr Dlamo Phelelani, Committee Researcher, said the Treasury was empowered by the Constitution for expenditure controls of the State. Funds or transfers could be stopped when there was non-compliance with measures. The Treasury could list reasons for stopping funds to municipalities. It had also been an issue in the previous financial year. Section 2 of the Constitution stipulated that the Treasury had to enforce compliance. However, it was stated that funds might be stopped, not that it had to. Stopping funds was not the only solution. The stopping of funds was a last resort. Other measures had to be considered first. There could be runaway unintended consequences. Service delivery had to be protected.

The Chairperson said there had to be thorough deliberation on the issue. The Treasury had noted that national did not always have capacity to spend indirect grants. The issue of State capacity was also at the national level. Service delivery suffered. There had to be capacity in the State. People had to be trained. The causes of lack of capacity had to be understood. It had to be understood why people could not perform.

Mr Musa Zamisa, Committee Researcher, said that planning in Chili would be incorporated into a study.

The Chairperson said the Parliamentary Budget Office (PBO) had to advise the Standing Committee. The Department of Economic Development could help the Committee to see how departments performed.

Mr Simmonds responded that the reporting environment of government was complex. The Department of Economic Development could provide information on conditional grants. He was not personally involved with fund stopping. The Intergovernmental relations unit could explain what measures were in place. It was possible to put together a workbook on spending.

The Chairperson concluded that Members could study data closely to be prepared for the story the second quarter report would have to tell. If departments were under 30 percent expenditure there was cause for concern. Departments always claimed that money was committed, but the question remained if it was going to be spent.

The meeting was adjourned.

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